Staying Afloat

To remain competitive in a tough environment, cement producers are adopting different operational methods to improve their bottom-line. Krishna Kumar takes a closer look.

With almost 390 MT capacity, at utilisation levels of close to 70 per cent, and with demand and price under pressure, the key for the survival of all cement players - regional or national - is cost-competitiveness. It is a myth that the major players decide the prices and the small regional players follow them. This convention is true, when prices are on an uptrend. But when demand is under pressure, with the accepted truth that cement is the least differentiated product, a price cut by a small local player can put pressure on the prices of other big players, and thus the overall industry price structure.

In the light of such market dynamics, where profitability drivers from the market provide no support, all players need to get their act together and work on cost-control levers.

The cost factor
While price, at the top line, is just one lever, there are multiple levers at the cost level that have a major impact on the bottom-line. Cost (driven by input prices, operational efficiency, consumption efficiency, logistics and human capital, to name a few parameters), is a major element in the value chain that does not get the same attention from top managements, as compared to price and volumes. This article is aimed to sensitise the elements of cost that should not be missed in the race for the top-line.

Of the total delivered cost (TDC) of cement, a typical distribution among the variable & fixed cost of production and distribution cost will be as depicted in the chart (See XXX), with variable cost comprising ~52 per cent of TDC, fixed cost at ~ 16 per cent and distribution cost at ~ 32 per cent. Going ahead in this analysis, we will focus on the major elements of variable cost and the industry trends.

Traditionally, the cement industry has been known only for production of OPC, but over the years, after rigorous efforts of the major cement players and institutions, blended cement is well established in the market. The cost of production of blended cement (PSC & PPC) for a grinding unit is usually lower than OPC in proportion of the absorption of fly ash or slag. For grinding units, an indicative number for 1 per cent addition absorption of slag/fly ash can bring down the cost of production of blended cement by Rs 20-Rs 30/tonne. But then the per cent absorption depends a lot on the choice of equipment (ball mill versus vertical mill) and the mindset of the operating team to take up the challenges of minutely ensuring the product quality. This is an example of consumption efficiency.

Fuel and electricity together comprise ~ 60 per cent of the variable cost and form the biggest portion of the pie. Many cement players have now substituted close to 100 per cent of fossil fuels by pet coke, thanks to the drop in crude prices. Fuel cost in Rs/kcal with pet coke had a potential to cost less than coal - by as much as 30 per cent - during the first quarter of this calendar year. Cement players who have been wary of the market conditions and were updated of the input price trend have leveraged this price differential. But then again, it´s the mindset of the operation team that is crucial. The team has to meet the challenges that are likely to be encountered due to the changes in fuel properties (coal v/s pet coke) as the existing operating lines may not be designed for handling different fuels.

Many integrated cement players depend on their captive power generation units for electricity, and such units again see a great potential in switching to alternate fuels for competitiveness.

The above factors are just two of the many levers that are available to become competitive, but these two are the major ones. But for any lever to be effective, the availability of the equipment and the utilisation of production capacity is the key. All the efficiencies that we talk about in review meetings can only be achieved when any equipment is operated at its designed level, and this offers economies of scale. In the Indian cement industry, the concept of breakdown maintenance has been prevalent for long. During the mid-80s, the focus shifted to preventive and predictive maintenance when various consultants brought in concepts like TPM and TQM. This was a big challenge to the traditional mindset of the operating team, because unless there is a breakdown, our engineers love to stay in their comfort zone. That´s because following the concepts of preventive and predictive maintenance calls for a high level of commitment and efforts every day in ensuring compliance to daily schedules.

To follow such a rigorous schedule would require a team committed to such management objectives. In other words, though we speak about system-driven processes, at the end, systems are to be driven by people. In short, being competitive is a people-driven activity.

Innovation needed
Cement is a bulk commodity that that becomes expensive to move beyond 500 km. Cement players have tried various innovative models over the decades to bring down distribution costs. Some models in the past were the hub & spoke model (C&F/warehouse model), then there were satellite grinding units and bulk/packing terminals, all with an objective to optimise distribution cost.

These models have reached saturation point. The industry needs to look into the next level of innovative models when the competition in this industry is as intense as in the FMCG industry. One potential innovation could be moving bagged cement in trucks mounted with containers and ply it like mobile mini-warehouses to cater to multiple small counters. Though the idea seems weird, it is not implausible. The need of the hour is some disruptive innovation; 32 per cent of the total delivered cost is shared by distribution cost.

This boils down to my strong belief that when all cement players choose to have the best of the equipment, in terms of efficiency and performance, when cement players do all the homework on techno-economic feasibility, the only thing that places one player ahead of the other is the team. It´s the people who drive the business that deliver the competitive edge.

So, the key for being competitive is human capital. Skill development, multi-tasking, engagement, bringing in the sense of ownership and such soft skills are the most important levers for being competitive. Finally it is the team which will accept the challenge to use the right fuel at the right time. It is this very team which will ensure 100 per cent availability of equipment, it is this team which will achieve 100 per cent utilisation level of its production capacity and it is this team which will deliver the product to the market at the most competitive rate.

To summarise, it is important to split the value chain into multiple elements and analyse each cost element and the input variables to that cost element. To do this, it essential to ensure the right team is in place, and the team is engaged for the purpose.

Author:
Krishna Kumar is a mechanical engineer and a management graduate from ISB Hyderabad. Presently Chief Executive - Cement & Construction Materials, JSPL, he has worked at various managerial levels in ACC, Lafarge, Holcim and Reliance Cement.